Thursday, 29 December 2016

In December of 2016, the U.S. Copyright Office released a 94-page
Report on Software Enabled Consumer Products [Report].The Report is in response to a request for analysis from
members of the Senate Judiciary Committee concerning current copyright law and the
ubiquitous nature of software.Notably,
the U.S. Copyright Office believes that, at least in the context of copyright
law, that there is not a need for new legislation. The U.S. Copyright Office appears to believe
that current flexibilities in the law can accommodate technological
change.In particular, the Report, in part, “examines
how software-enabled consumer products can be resold, repaired or improved,
researched for security flaws, or made to interoperate with other products or
software.” The Report concludes that:

The Office’s study did not reveal evidence that consumers
have been prevented from reselling or otherwise disposing of their
software-enabled consumer products.The
Office does not see a current need for legislative change relating to resale,
so long as courts properly apply the first-sale right embodied in section 109
of the Copyright Act.

The Office recognizes the value of allowing the public to
freely repair defective consumer products and tinker with products to improve
their function.But establishing a new
statutory framework explicitly permitting repair and tinkering does not appear
to be necessary at this time.Properly
understood, existing copyright law doctrines—including the idea/expression
dichotomy, fair use, merger, scènes à faire, and section 117—should continue to
facilitate these types of activities.

Similarly, the Office recognizes the value of allowing the
public to engage in good-faith security research of software-enabled consumer
products.Again, however, statutory
changes (at least outside the context of the anticircumvention provisions in
section 1201) do not appear to be necessary at present.Existing copyright law doctrines should
protect this legitimate activity.

The Office recognizes the significance of preserving the ability
to develop products and services that can interoperate with software-enabled
consumer products, and the related goal of preserving competition in the
marketplace.While a new statutory
framework might help reduce some uncertainty in this area, such action does not
appear to be necessary at this time.Again, faithful application of existing copyright law doctrines can
preserve the twin principles of interoperability and competition.

The Office’s study found that, in certain circumstances, such
as resale, there is only limited evidence regarding real-world
restrictions.Accordingly, the Office
believes that the question of ownership versus licensing, while very important,
is one that can be resolved with the proper application of existing case law.

The Copyright Office further
stated that in the context of resale:

Some commenters made the claim that—even if manufacturers of
software-enabled products do not currently impose restrictions on resale as
part of software licensing agreements—they may do so in the future in an
attempt to eliminate secondary markets for software-enabled products.The Copyright Office agrees that if license
agreements in the future interfere with consumers’ ability to resell or
otherwise dispose of their software-enabled products, such a practice would be
a concern worthy of legislative attention.One possible solution is YODA, mentioned above, a bill that several
commenters supported as a good starting point to resolve concerns regarding the
resale or transfer of software-enabled consumer products.At the same time, there may be reasons to
think that this issue is unlikely to arise, including that market forces—such
as the efforts of consumer advocacy groups to shed light on abusive
practices—are a barrier to engaging in behavior of this sort.

In an intriguing post, co-Blogger Neil Wilkof recently
discussed how essentially elite firms may be beating the competition.In a recent article on Reuters titled “Facebook Forges Agreement with 17 Universities to Streamline Research,” Dustin Volz
discusses how Facebook has entered into partnerships (which includes unstated
funding) with 17 major research institutions, including Harvard, Stanford and
MIT, for the opportunity to work together on forthcoming research.The article is a little light on details
concerning the agreements. As I
described Steve Blank's discussion in an earlier post, some firms have placed outposts in technology
innovation hotbeds to track new cutting edge developments and companies.For sure, the nimble survive and those who
are not do not—see Kodak.However,
Facebook may be strategically moving one step forward by starting at the source
of some of the new major developments.This arguably gives Facebook the “first” opportunity to scoop up new research
and ideas as they develop in leading research universities.Is this a good thing or a bad thing for innovation and importantly
competition?

The Reuters article states that:

The agreement between Facebook's Building 8 and the
universities comes as the social media company seeks to find new revenue
streams in virtual reality and artificial intelligence, after the company
signaled last month it had begun to hit some advertising growth limits on its
network of 1.8 billion monthly active users.

Research partnerships between universities and companies
typically take nine to 12 months to facilitate, but the new agreement will
allow for collaboration on new ideas within weeks, said Regina Dugan, who
joined the company in April to run the new Building 8 unit.

Dugan did not provide specifics to explain how the
partnership will promote a quicker pace of research, but traditional
negotiations between universities and companies can often take several months.

Friday, 23 December 2016

The Association of University Technology Managers (AUTM) has
released a Highlights report concerning its FY2015 annual survey.The results of the survey are promising.For example, there was a 15% increase from the
prior year of licenses and options executed.An almost 15% increase in new patent applications filed.Over an 11% increase in the number of
start-ups created.And, a 5% increase in
both research expenditures and invention disclosures.I am not too excited about using patent
applications and grants as a metric for technology transfer success, but the
licenses, options, number of startups and research expenditures is
positive.Moreover, the supposed
increase in using consultancy agreements and licensed know-how divorced from patents by
technology transfer offices may point to even more actual technology transfer happening
from university to the private sector.(I
am assuming the reported licenses and options are associated with
patents.)

The Highlights further states that 879 new products have
been introduced to the market and $28 billion “in net sales from new products”
has been realized.Interestingly, 785 of
the 1,012 startups were formed in the research institution's home state. Importantly, $2.5 billion in
licensing income was collected which is 28.4% more than the prior year.It would be interesting to see that $2.5
billion number broken down by patent and product/service (for a critique of using revenue generated as a metric of technology transfer success, see here).AUTM notes that 3.8 million jobs have been created
as well as 153 new drugs and vaccines on the market “because of the Bayh-Dole
Act.”There was about a 65% response
rate to the survey—202 of 308 institutions participated.

Thursday, 22 December 2016

Jackie McGuire, at Coller IP, has informed us that she and Martin Brassell, at Inngot, are undertaking a study of the IP valuation market for the UK Intellectual Property Office, including the structure of the IP valuation market, motivations and barriers to engagement, and best practice in different contexts.

Jackie notes that prior studies for the Intellectual Property Office have established that the majority of UK business investment, and business value, now lies in intangible rather than fixed, tangible assets. Despite this, companies do not always value their IP or take steps to protect the value that it underpins. The study builds on the report from the European Commission Expert Working Group on IP Valuation and Banking on IP. The results will be used to inform UK policy and to develop solutions to promote the wider adoption of IP and intangible asset valuation.

All discussions on this study are using the Chatham House Rule. They will use the information received, and with permission, reference the company’s participation in a published report. While they would welcome the opportunity to use specific case studies, they will not link the personal identity of those interviewed or that of the company with specific comments or findings, without prior approval.

Please contact Martin@inngot.com or Jackie.Maguire@collerip.com by 15th January 2017.

Monday, 19 December 2016

The Economist magazine recently discussed (“The great divergence’, November 12th) an (unnamed) research report carried out by three researchers at OECD (Dan Andrews, Chiara Criscuolo and Peter Gal), which suggests that the Schumpeterian notion of “creative destruction” may be stuck in neutral. Leading companies seem more and more to be enjoying a continuing lead in their industries, with less and less challenges from scrappy newcomers.

In particular, the report found a major distinction in productivity between the top 5% companies surveyed. These so-called “frontier” companies show productivity gains of 2.6% per year, while the remaining 95% have managed only 0.6% productivity gains. The difference in productivity is even more stark when comes to services: 3.6% for the frontier companies as compared to only 0.4% for the stragglers. Two major themes relating to IP emerge from The Economist article: (i) the role of patents and know-how; and (ii) the transmission mechanism for innovation.

The role of patents and know-how—Regarding patents, the report states that frontier companies “[u]nsurprisingly …are ahead of the pack in technological terms, and they make much intensive use of patents.” No more explanation is provided, which is a shame, because the statement as provided is not entirely clear. How does one measure “intensive use of patents”; is it a quantitative or qualitative analysis? Is it really the case that a major indicium that distinguishes between the frontier companies and the laggards is patent activity? One need only think of the large patent portfolios that were sold several years ago by failing companies such as Kodak and Nortel. It is a pity that the article does not elaborate.

Of equal interest is the role of know-how. The article writes that “…frontier firms (the 5%) have each discovered their own secret sauce”, going on to describe the know-how that has enabled companies such as 3G Capital (a successful, Brazilian-based private equity firm), Amazon, and BMW to dominate. The linkages between the patent position and the development of special know-how tailored to each of these companies’ activities suggest that the two work in tandem.

If so, even the most sophisticated patent analytics may be missing a crucial component in seeking to explain the success of technology-based companies. What may be needed is a metric measuring the contribution of know-how, which can then be applied together with patent analytics to provide a more robust picture of the IP position of these companies, and whether any generalizable insights can be obtained.

The transmission mechanism for innovation-- Here, the article focuses on how technology spreads horizontally between companies that are members of the top 5% as well as vertically within a given economy. The suggestion is made that with respect to frontier companies—

“…technological innovations from the frontier are spreading more rapidly across countries than they are within them. The gap between an elite British firm and an elite Chinese firm is narrowing even as the gap between an elite British firm and its laggardly compatriots is expanding.”

The upshot is that—

“…technological diffusion has stalled: cutting-edge ideas are not spreading through the economy in the way that they used to, leaving productivity-improving ideas stuck at the frontier.”

The result is what has been termed a “winner takes all (or at least most)” position in the relevant market. Schumpeterian notions of “creative destruction” are less likely to apply because not only do the frontier companies better exploit their patent/know-how mix, but they are able to attract the most talented persons in their industry. In such a scenario, continuing incumbency as an industry leader becomes more of the norm.

The causal direction of this relationship is not entirely clear, i.e., do more talented people lead to a continued stream of better patents and know-how, or is it the reverse, or are they merely coincident factors in connection with productivity and market dominance? Of perhaps greater concern is the suggestion that useful IP, particularly patents, will be increasingly the purview of only the top layer of companies, with less and less vertical transmission within the relevant industry. When leavened together with unique know-how, this combination gives rise to the increasingly expressed concern that IP, particularly patents, are more an instrument for maintaining market power than a facilitator of broad-based innovation.

Thursday, 8 December 2016

In recent posts (here and here), I have discussed China’s increased
protection of intellectual property rights.
Recently, Ian Harvey, the chair of the IP Center Advisory Board at Tsinghua
University x Lab in Beijing, sent me his excellent paper on China’s IP law. Notably, his paper outlines how China’s
enforcement of intellectual property has improved and does not deserve its past
reputation. Powerpoint slides relating
to his paper are available, here.

Recently, China’s Supreme People’s Court issued a ruling
recognizing Michael Jordan’s rights to his name in Chinese characters. This decision sends a powerful message both
in China and outside China that intellectual property rights will be
respected. Importantly, this is the enforcement
of IP rights that were arguably not secured by Michael Jordan in China and
there are strong reliance interests by the Chinese company. I believe the symbolic
importance of this decision cannot be overstated. Interestingly, there are more reports concerning venture capital moving from the United States to Europe and China because of recent developments in U.S. intellectual property law, such as the Alice decision. What will be Donald Trump's reaction? For more on the decision, please see the New
York Times article, Michael Jordan Owns Right to His Name in Chinese Characters, Too, Court Rules.

I would like to introduce you to guest
blogger Trevor Soames, a leading Brussels based antitrust lawyer
with extensive experience of major high tech and IP-related investigations and
litigation, having represented several major corporations in various cases over
the years including Qualcomm, Nokia, Samsung and Microsoft.

The Competition Directorate of the
European Commission (DG Comp) has, over the years, become increasingly
interested and active in the field of SEPs.

In a series of cases it has investigated
a variety of potential competition law issues arising from the FRAND
commitment, including allegations of patent ambush in Rambus, the transfer of
FRAND commitments in IPCom,
the risk of supposed “hold up” resulting from SEP holders seeking injunctive
relief in Samsung, and in Motorola, here, and here.In
addition, the European Commission investigated Qualcomm between 2005 and 2009
for, inter alia, alleged excessive pricing regarding its FRAND-committed SEPs.
However, the
case was terminated by the Commission when the four outstanding complaints
were voluntarily withdrawn.

On 21 November 2016, the European
Competition Commissioner, Margarethe Vestager, delivered
a speech which indicated that the she intended to use the competition
law tools at her disposal to deal more aggressively with excessive pricing
cases. She claimed smartphone royalties could be unjustifaibly high. I have already blogged, here,
about her use of a defective aggregate royalty figure in support
of her claims in this speech.

The following article by written by Trevor, and based on what he posted, here,
comments generally on her speech, the policy issues that it raises and the
wrongful identification of SEPs as being a supposed example of excessive
pricing: "The Opening of the Door: is Excessive
Pricing Control under Article 102 TFEU coming back into vogue

Commentary on Commissioner Vestager’s
speech

Trevor Soames

Commissioner Vestager’s speech deliveredat Chillin’ Competition on 21 November 2016 entitled “Protecting consumers from
exploitation,” spent much time discussing the application of Article 102 TFEU to excessive
pricing. A video of the speech is
available on the Chillin’ Competition website, here, together with
the Q&A in which the Commissioner said that she is taking a door which was
almost closed and opening it a little.
The Q&A is at 14.50, my comment and question at 16.30 and the
Commissioner’s response thereafter.

This short note provides a brief
commentary on the subject of excessive pricing, European Commission enforcement
policy, the examples cited by the Commissioner and what all this may mean for
the application of Article 102 TFEU.

Excessive pricing control under Article
102 TFEU has been a fraught subject ever since the United Brands judgment of the CJEU. For our US cousins, the very
idea that antitrust law could apply to excessive pricing must seem more than
passing strange. The Supreme Court made
its views on the subject very clear in Justice Scalia’s Trinko opinion where he argued that the "mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only
not unlawful; it is an important element of the free-market system. The
opportunity to charge monopoly prices – at least for a short period – is what attracts
'business acumen' in the first place; it induces risk taking that produces
innovation and economic growth”.

The European Commission, to its
great credit, has exercised great restraint in applying Article 102 TFEU in
this area. A critical step in this
process of increasing self-restraint was the adoption of the two Helsingborg complaint rejection decisions
in 2014 which, unusually for such decisions, made a finding not merely that
there was no Community interest in investigating the case further but rather,
and more strongly, that there was “insufficient evidence to conclude that the
prices charged…are unfair/excessive and thus constitute an abuse within the
meaning of article 82 of the Treaty”. The decisions are worth (re-) reading,
see thisand this.

Since that time there have been
very few cases of excessive pricing at EU level. Except for a handful of exceptional cases,
those which have been investigated as such have been terminated by the Commission
without findings of infringement.

The European Commission
emphasised its cautious and restrained approach to the application of Article
102 TFEU to alleged excessive pricing in its written submission to the OECD of
7 October 2011. The paper provides a useful summary of its enforcement policy,
the rationale behind its emphasis on exclusionary practices and the problems
that would be encountered in taking on excessive pricing cases. Given that this subject has raised its head
again, re-reading this carefully written paper is well worthwhile. The position was well summarised at para. 42,
as follows:

“It
seems that enforcement action against excessive prices has only been considered
as a last resort, in markets where high prices and high profits do not have
their usual signalling function to attract entry and expansion because of very
high and long lasting barriers to entry and expansion. This recognises that
even though in many markets prices may be temporarily high, due to a mismatch
of demand and supply or the exercise of market power, it is preferable to give
market forces the time to play out and entry and expansion to take place,
thereby bringing prices back to more normal levels. We have not seen
enforcement activity in such markets, recognising that it would be unwise to
run the risk of taking a wrong decision and furthermore spend enforcement
resources on solving a problem that would solve itself over time anyway. This
is so even in markets characterised by sufficient entry barriers where there
can be dominant firms. Of course, it may be that a dominant firm tries to
prevent this process of entry and expansion taking place by artificially
raising entry barriers. However, in such a situation it is more efficient for
the competition authority to tackle the raising of these entry barriers
directly since this will likely amount to an exclusionary abuse. If, however,
the market is characterized by such entry barriers that it is unlikely that
market forces over time will bring prices down, enforcement actions aimed
directly against excessive prices may indeed be appropriate.”

We have seen, however, a greater
willingness by some member states with less self-control than the Commission to
develop cases in this area. We have also
seen other non-EU competition jurisdictions which look to the EU for
inspiration in the area of dominance control seeking to utilise their domestic
Article 102 equivalents to attack what they see as excessive pricing or unfair
terms. Some of these cases have been
notorious in terms of the intellectual contortions and use (sometimes misuse) of
EU case law relied on to reach their conclusions.

Although the Commissioner
identified a few limits to the application of excessive pricing control, she
gave a clear message. Namely, that the
European Commission is open for business in this area in a manner not seen for
many years. In response to my question,
she confirmed that a door which had been almost closed has now been opened, at
least to some degree. She said “...we’re
still bound to come across cases where competition hasn’t been enough to
provide a real choice. Where dominant businesses are exploiting their
customers, by charging excessive prices or imposing unfair terms”. Rightly, she emphasised caution saying that “we
have to be careful in the way we deal with those situations.Because sometimes, a company is dominant simply because it’s better
than its competitors. And when that’s the case, it’s only fair that it should
get the rewards of its efforts.But we also need to be
careful that we don’t end up with competition authorities taking the place of
the market. The last thing we should be doing is to set ourselves up as a
regulator, deciding on the right price”.

However, “there can still be
times when we need to intervene”. In
closing the Commissioner said that “we need to act carefully when we deal with
excessive prices. The best defence against exploitation remains the ability to
walk away. So, we can often protect consumers just by stopping powerful
companies from driving their rivals out of the market.But we still have the option
of acting directly against excessive prices.Because we have a
responsibility to the public. And we should be willing to use every means we
have to fulfil that responsibility”.

For me, it is those last two
sentences that gave some cause for concern and indicated that the door was
being opened, as was indeed confirmed.

Now, it is true, that the
Commissioner stated that excessive pricing control should only be used where
there is no ability for the customer/consumer to “walk away”. The product or
service being charged for does not need to be an essential facility in the
manner normally used, namely whether access to the deemed essential facility is
denied to a competitor, or is granted only on discriminatory terms, but rather
whether the customer/consumer has a choice (note that the Commissioner didn’t
use the essential facility concept, the application of which has been limited
after the Oscar Bronner case). Furthermore, the Commissioner says that
although there may be future cases where alleged excessive pricing may be
investigated and, indeed, decided upon, the Commission would not be a price
regulator and would not decide on “the right price”. That is all very well and it sounds
comforting, but what it really means is that the Commission would merely decide
that the price charged was unlawful, explain the grounds on which it so held
and no doubt order that the price be adjusted so that it was reasonable. Little
guidance may be provided by the Commission as to what it considers reasonable
in the particular circumstances and if the allegedly dominant company gets its
pricing wrong, it will be fined for having failed to comply with the
Commission’s order without being able to seek clarity from a Court. So, although the Commission would indeed not
“set” the price, its actions would undoubtedly change the pricing levels set
and the impugned and allegedly company would need to be cautious. De facto the Commission will therefore
be a price regulator, whatever it may claim.

Let us turn (briefly) to the
three examples of excessive pricing identified by the Commissioner, Gazprom,
pharmaceuticals and Standard Essential Patents (SEPs):

Gazprom: this is not a pure excessive pricing case at all and
seems a strange example to choose. The
Commission’s allegations revolve around a series of exclusionary behaviours,
territorial restrictions and market partitioning including export bans,
destination clauses and measures that prevent the cross-border flow of gas, the
combination of which has resulted in higher gas prices and the segmentation of
gas markets along national borders.

Pharmaceuticals:
the Commissioner seemed to be focussed on a number of examples of off-patent
drugs having been subject to significant price increases. A notorious example was the 5,000% price
increase implemented by Turing Pharmaceuticals and its CEO Martin Shkreli for Daraprim,
a 62 year old medication. In addition there have been a number of NCA
investigations as referred to by the Commissioner, including the recent Article
102 TFEU decision of the UK CMA regarding alleged excessive pricing for
phenytoin sodium capsules (Pfizer/Flynn).
These cases warrant a lengthier discussion than is possible in this note, but
there are special circumstances at play in the pharmaceutical sector due to Government
imposed price regulation that create a somewhat unique environment within which
competition law operates. One might have
thought, along the lines of Justice Scalia’s reasoning in Trinko, that an off-patent drug which is subject to a substantial
price increase would incentivise new entrants to generate competitive
alternatives. This would be consistent
with para. 61 of the European Commission’s 2011 OECD paper where it stated that
“enforcement
against excessive prices is generally only contemplated in markets with an
entrenched dominant position where entry and expansion of competitors cannot be
expected to ensure effective competition in the foreseeable future, that is
markets where high prices and high profits do not have their usual signalling
function to attract entry and expansion.”

SEPs:
this is yet another strange example to have been included in the Commissioner’s
list as it relates to an alleged phenomenon (royalty stacking and hold-up) for
which there is no evidence at all. Unlike
the Gazprom and pharmaceutical examples cited by the Commissioner, the claimed
phenomenon is entirely hypothetical and there is no empirical evidence that
shows or proves that it exists. The
speech claims that a recent study “shows that 120 dollars of the cost of each
smartphone comes from paying royalties for the patents it contains.” This is untrue. The
study cited by the Commissioner is based on a purely hypothetical
analysis as its authors themselves said when they caveated the report by
stating that “we estimate
potential patent royalties in excess of $120 on a hypothetical $400 smartphone.” Even Professor Carl Shapiro, one of
the leading proponents of the royalty stacking and hold up theory was unable in
his 2015 IEEE paper to provide any such evidence, see the note
I posted on this subject, here.
There are multiple recent studies on this subject that elaborate on the utter
and complete absence of any empirical evidence and, indeed, in the case of one
important paper by Padilla and Llobet on “The Inverse Cournot Effect in
Royalty Negotiations with Complementary Patents”seeks to
explain, in a rigorous manner, why royalty stacking is not observed in real, as
opposed to hypothetical, life. In other words, the Commissioner’s SEP example of
alleged excessive pricing is no example at all.

In conclusion, I cannot recall a Competition
Commissioner’s speech on excessive pricing in recent times. It was clearly delivered for a purpose and as
the Commissioner confirmed it would seem that “a door which was almost closed”
has now been opened “a little”. But what
does that mean? Some of the statements
made, as well as examples used, give cause for concern. We will have to wait and see how this policy
initiative develops, both at the Commission and at member state level. My sense is that there is a greater potential
for investigation and intervention in this area than for many years and a
political willingness to go into territory only rarely entered into previously.

It was
irresponsible of European Competition Commissioner, Margrethe Vestager, to say
in a
speechabout excessive prices last month that “[o]ne recent study shows that 120 dollars of the cost
of each smartphone comes from paying royalties for the patents it contains.”

Commissioner
Vestager is alleging that licensing prices for standard-essential patents are
too high, and she would like them reduced. Nothing could be more important than
having reliable support for her allegation. She did not provide this.

To the contrary, the quoted sentence is reprehensible for several reasons:

The $120 figure, equivalent to a 30 percent aggregate royalty rate on a $400 phone, is wide of the mark. Nobody is paying anywhere near as much. Actual figures paid are, on average, less than one sixth that figure, at under $20 or below 5 percent of total handset costs.

Her source is not cited. It is obvious to those who focus on smartphone licensing charges that she has plucked the figure from the much-criticized, here, and, here, “Smartphone Royalty Stack” paper by Intel and Wilmer Hale. Without her including any reference to help listeners and readers find the study or those who rebut it, folk might take the greatly-inflated figure at face value.

The study is not recent and provides no fresh perspective. It was published two and a half years ago, in May 2014.

It misrepresents the study’s findings. Commissioner Vestager has either ignorantly and unwittingly or sinisterly disregarded how the study cunningly characterizes this $120 figure. That figure does not represent what is actually paid in cash or recorded in financial or management accounts as licensing revenue or licensing expense. It is a notional cost that is not adjusted for what is netted-off in cross-licensing. The study is weasel worded: “setting aside off-sets such as ‘payments’ made in the form of cross-licenses and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone” (underling added for emphasis). This is flawed economics, as well as misleading and disingenuous.

The study includes various additional systematic errors in its analysis including disregard for clear public evidence that much lower rates are being paid than those it includes in its calculations in most cases.

Despite seeking and receiving external inputs, the European Commission continues to ignore logical and facts-based assessments of aggregate royalty rates that are in marked disagreement with the study by Intel and Wilmer Hale. The Commission’s DG GROW ran a consultation on patents and standards commencing 2014. My initial estimate of 5 percent aggregate mobile phone royalties was included in my submission to that consultation in February 2015 (pages 21-22). That finding has been reinforced in my subsequent publications and validated by other reputable experts.

Lies, damn lies and misleading or defective
analysis

The recent US
presidential election and Brexit referendum campaigns were significantly blighted
by use of defective or highly misleading “facts” and figures. This “post-truth politics”tactic is nothing new
or unique to those seeking votes. It is particularly troubling that public
officials are also so inclined to unquestioningly adopt certain figures and
ignore others solely based on what supports policy positions, popular beliefs
or prejudices, and with disregard for scientific and evidentiary principles in
quantitative research.

My extensive analysis
shows the Smartphone Royalty Stack paper’s 30 percent royalty rate was defective.
In IP Finance, here, in September 2014, I explained how
this study was flawed, and, here, in August 2015, I showed in detailed analysis that average aggregate royalty payments were at most
around 5 percent and were probably substantially less on mobile phones overall,
including smartphones that dominate that product category. The faulty “royalty-stacking” theory upon which this paper by Intel and Wilmer Hale is based, has also been debunked
by others. Adding up all the
licensors’ listed maximum royalty rates does not provide a suitable indication
of royalty costs, let alone an accurate measure of what is actually being paid
in licensing fees.

Two separate
eminent academic authorities in economics, Criterion
Economicsand the Hoover
Institution, have validated the methodology in my 2015 article in their recent publications since mid-2016.
Both studies calculate the majority of royalties in exactly the same way as I
have and are broadly in agreement with the results I derived by “following the
money,” as authors of the latter study, Haber, Galetovic and Zaretzki,
characterise it. They also agree with me that only net royalty payments, after cross-licensing,
should be included in aggregate royalty amounts and rates.[1] Gregory Sidak of Criterion Economics
independently checked my assessments and compared these with his own,
step-by-step. These studies find that aggregate royalties are approximately 3.3 percent (Hoover Institution) and 4.5 percent (Criterion Economics).

Aggregate Licensing Fee Estimates for Mobile Phones Including Smartphonesin Two Totally Different Ballparks (Applicable Year 2014 or 2015)

Some elements
in my 2015 paper were extremely conservative. For example, whereas I used the
asking prices of LTE patent pools to derive my estimate of annual royalty
payments of less than $4bn
(equivalent to 1 percent of aggregate royalties), I note that these pools still
seem to have very few or no licensees, and so I conclude the actual figure was
and remains much, much closer to zero than it is to $4bn.

Whereas these
two recent studies also show that aggregate royalties are conservatively in the
“ballpark” of around 5 percent or less, rather than at 30 percent as estimated
by Intel and Wilmer Hale, these two recent studies build on my work and seek to
estimate the aggregate royalty rate with greater precision while also maintaining
a conservatively-high bias in estimates. There are some differences among
studies with respect to inclusion of non-mobile SEPs and non-SEPs, feature
phones and tablets. These have only secondary effects on overall results and
the aggregate percentages estimated.

We have been here before

Other wildly-exaggerated and yet widely-quotedcost
figures have included $83 billion in social costs and $29 billion in direct
costs annually to patent infringement defendants for the alleged “patent troll” problem estimated by academics James Bessen and
Michael Meuer in 2011 and 2012. Such figures were much
contested for years and I, among others, was most critical
of the adoption of such figures by public bodies including the White House in
2015.

A 2016 study on Patent Assertion Entities
by the US Federal Trade Commission presents much lower and far more reliable
figures. It found study PAEs generating a total of only $4 billion in licensing
over the six-year study period from 2009 to 2014. This is equivalent to less
than $700 million per annum. Whereas the FTC study is not exhaustive in scope,
it is nevertheless quite broad including 22 responding and 2,500 affiliated
entities with 327 of these engaged in “active assertion behaviour” and it
appears to have captured a large proportion of PAE licensing transactions. The
more than forty-fold difference between annual totals based on extensive
documented evidence submitted to the FTC and the estimates in these other
studies is irreconcilable.

Post-“post-truth” please

Public officials should be more transparent about where the “facts”
and figures they use to support their arguments and wishes come from. They
should take the trouble to understand and not misrepresent their sources, even
unwittingly. They should make the effort to consider opposing facts, figures
and analyses. Some balance might help, but this should not be simply a case of reflecting
differing or opposing positions without merit. Public authorities have a duty
to find the truth of the matter with accurate and reliable figures, and present
this in their public communications. Approximately correct might be fit for
purpose and acceptable, whereas precisely wrong is no good at all. Scientific
and evidentiary principles must apply.

For a broader critique of Commissioner Vestager’s entire
speech, with respect to the competition law and policy issues it raises, I
recommend you read this this article by Trevor
Soames.

[1]
See footnote 7: “we do not include the opportunity cost borne by a manufacturer
that buys patents to prevent claims of infringement, or the opportunity cost
borne by manufacturers who cross license their patents (in a cross licensing
agreement firms may forego some or any royalty payment in exchange for access
to another firm’s portfolio), or the membership subscriptions paid to defensive
aggregators of patents. Such expenditures will increase a firm’s fixed costs.
They will not, however, affect marginal costs of production, and thus not
influence production and pricing decisions at the margin.”

The National Football League Player’s Association [NFLPA]
(American Football, that is) in the United States has announced a fascinating
collaboration called “OneTeam Collective” between the NFLPA, NFL athletes, venture capitalists, and Harvard
University, among others, in the form of something like an
incubator. Apparently, the gist of the
idea is to allow easy licensing and exploitation of IP rights of NFL athletes
by start-ups. The NFLPA basically holds
the IP rights of NFL players and now those rights will be available to early
stage companies, as described in Tech Crunch in "NFL Players Association Is Launching An Accelerator to Trade IP Rights For Equity."
This raises a host of opportunities to utilize those IP rights in, perhaps, new
ways.

The OneTeam Collective will be the
first program providing rights to
sports-related intellectual property, highlighted by the NFLPA’s exclusive
group licensing rights and unparalleled access to more than 2,000 current NFL
players.

The well-rounded founding portfolio will consist
of KPCB and Madrona Venture Group providing consulting
services and potential funding; Harvard Innovation Lab providing access to
a campus environment focused on entrepreneurship for student-led events and
competitions, such as hackathons; and Intel providing valuable input from
a global innovative leader, as well as potential
funding. LeadDog Marketing Group–an award-winning integrated,
experiential marketing agency–will provide sports marketing and strategic
planning resources. The Sports Innovation Lab will provide additional
support to the OneTeam Collective and its portfolio companies.

I do hope that the eventual funding from these ventures will
inure to the benefit of the players. The
troubling stories concerning the physical and mental impact of concussions in the
sport is a serious concern. Moreover,
the NFL has long been known as “Not For Long:” the average player has a very
short career span and there is the very sad (developing) story concerning the recent death
of Rashaan Salaam. The NFLPA press release seems to suggest that there could be
many opportunities developed just from the close collaboration from the interested
parties, perhaps even ventures that would need additional player
endorsement.

If this idea hasn’t been adopted in other countries, it looks like one to closely watch and perhaps emulate. A potential underexploited resource—the IP—put in the position to be widely utilized for potential benefit of . . . hopefully the players. The
press release provides some hope:

Another unique element of the OneTeam Collective is its
Athlete Advisory Board. These individuals will engage with founding partners
and provide strategic input on portfolio companies and new prospects. Athletes
will benefit by having the ability to directly interact with founding partners
and portfolio companies, in order to establish a professional network, while
also exploring business and career opportunities. The inaugural members of the
board will consist of both active and former NFL players, including
Kelvin Beachum, Mark Herzlich, Dhani Jones,
Isaiah Kacyvenski, Ryan Nece, and Russell Okung.

"Players, both past and present, have so much to offer -
but never in a way like this," said former NFL Player and current Managing
Partner of Qey Capital and Investor on CNBC's Adventure
Capitalist Dhani Jones. "The OneTeam Collective is
going to help develop and promote concepts and products that were previously
just left to survive on their own. With this accelerator in place, and with
players helping power it, companies can get off the ground and into people's
lives. It's a great feeling to be involved in something of this
magnitude."

Monday, 5 December 2016

From today's draft Finance Bill overview:"2.13. Patent Box: cost sharing for collaborative Research and Development (R&D)

As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to add specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.

The new rules provide that:

where a company acquires an interest in or increases its interest in aCSA, an appropriate amount of the consideration paid counts as acquisition cost for the purpose of calculating theR&Dfraction, to the extent any Intellectual Property (IP) assets are held within theCSA

where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA

activity of participants in theCSAto developIPor products is appropriately treated in the company’sR&Dfraction

This has effect for accounting periods commencing on or after 1 April 2017. Draft legislation (provision 24) and a TIIN has been published on 5 December."

This should be filed under "not particularly surprising", it's been a gap in the legislation/guidance for some time.

Sunday, 4 December 2016

As the major hotel brand owners consolidate, more and more brands identifying hotels of differing types of luxury and status (and therefore of

price?) are finding themselves under a single ownership roof. This poses special branding challenges, as the conglomerates seek the best way to maintain brand equity in the house mark while at the same time attempting to distinguish each of the separate branded hotels. This can lead to some interesting results. Let us consider two examples.

The first relates to a situation where the company is apparently prepared to tolerate actual confusion between two hotels, each owned by the same company. In connection with the 2015 International Trademark Association Annual Meeting in San Diego, this blogger made his way to what he thought was the Hotel Palomar. Upon arriving at the hotel and making some inquires, he was told: “Sir, you are at the wrong hotel. You don’t want the Hotel Solamar, you want the Hotel Palomar” (which is about a 10-minute walk away). I then continued: “How often does it happen that a person confuses one hotel with the other”? The answer, “From time to time, but we don’t really care, since both the Hotel Solamar and the Hotel Palomar belong to the same group, the Kimpton Hotels.” So, there it was—as a consumer I had been confused, but from the point of view of the trade mark owner, confusion was less of concern, it would seem, than the time and expense of rebranding one of the two hotels.

The second refers to a recent piece that appeared on Bloomberg.com entitled “Marriot and Starwood Reveal the Future of Their Luxury Brands”. As readers may recall, Marriott’s acquisition of Starwood will result in expanding Marriott’s brand holdings (at 19 brands, already the biggest in the world) to 30 brands. What does Marriott intend to do with these multiple brands? In an interview with Bloomberg, Tina Edmundson, the global brand officer of Marriott, set out her company’s branding strategy. The following points made in the interview are particularly noteworthy.

1. For the moment, all 30 brands will remain, even if the author of the piece, Nikki Ekstein, commented--“We remain skeptical about that in the long run.” Interestingly, Edmundson had previously worked for Starwood for 18 years prior to joining Marriott, so her connection with all 30 brands is long-standing and intimate.

2. When one hears the words “Marriott” and “luxury”, he or she will likely think in terms of Ritz-Carton, Ritz-Carlton Reserve, Bvgari, St. Regis, Edition, the Luxury Collection and JW Marriott, all of which are designated “luxury” by the company. But not all Marriott luxury hotels are equally “luxurious”, it would seem. Ritz-Carton, St. Regis, and JW Marriott will all be identified as “classic luxury”, with the other hotels will all be designated as “distinctive luxury”. The first category focuses on traditional and business travelers, while the second addresses patrons seeking a modern, boutique-y hotel experience.

3. Of particular interest will be how the Ritz-Carlton and St. Regis brands, which Ekstein likened in the piece to two boxers “occup[ying] opposite corners of the same boxing ring”, and which are “very similar in style and taste”, will move from competing over the same type of customer to sharing them. The company apparently will do so by segmenting luxury customers into two distinct categories—the Ritz-Carlton consumer is about “discovery”, while that of the St. Regis patron is about “status and connoisseurship”; the Ritz-Carlton “is about connecting people to places”, while the St. Regis “itself is the place where people want to see and be seen.” Will this work, or will the two hotel brands simply cannibalize each other’s customers? Obviously, Edmundson thinks that it will succeed.

Whatever one’s lodging preferences, from the IP and branding point of view, what Marriott has embarked on in seeking to maintain 30 different brands, including eight different “luxury” brands, seems to be uncharted branding waters. Indeed, the success of the company in doing so may shed light on the the extent to which consolidation in the hotel industry involving companies of this size can work side by side with successfully supporting multiple brands.

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